US Strategy Weekly: Pros and Cons

As noted last week, we remain a buyer of market weakness over the longer term but given the unpredictability and messiness of the war in the Mideast, we remain cautious in the short term. War-time changeability and chaos are best represented by the wild swings in the price of crude oil. There is no shortage of oil around the world and prices are expected to return to normal in coming weeks, but over 68 loaded oil tankers, or roughly 4.2 billion gallons of crude, are currently trapped or delayed in the Persian Gulf region due to the conflict. This has triggered volatility in WTI intermediate crude futures (CLC1 – $83.45), which rose from a closing price of $65.21 on February 26 to a recent intraday high of $119.48, before closing just above $83 a barrel on March 10. Both Brent crude and WTI prices are roughly 40% higher than they were earlier in the year and this will put pressure on consumers and inflation benchmarks if the Strait of Hormuz does not open soon. According to price-tracking data from AAA, the average price for a gallon of gas in the US was up six cents this week to roughly $3.54, and the only state with gas prices under $3 a gallon was Kansas at $2.96. California continues to have the most expensive gas in the US, with a gallon costing an average of $5.29.  

Cons

The inflationary impact of higher energy prices clearly poses a risk to the economy since higher energy costs hurt middle and lower-income households most severely. It could also mean the Federal Reserve may postpone lowering interest rates and this would be a disappointment to the consensus.

Another concern we have is the weakness in the job market. The employment environment has been deteriorating for over six months, but the increased use of AI is clearly stunting job growth.

The February jobs report was a negative surprise with a loss of 92,000 jobs for the month (versus expectations of a 50,000+ increase) and the unemployment rate rose 0.1% to 4.4%. According to the BLS establishment survey, employment grew by a mere 156,000 jobs in the 12 months ended February. More disturbingly, the household survey showed a 12-month decline of 426,000 jobs. See page 4. However, the BLS delayed its annual Census Bureau population update from January to February, which means February’s report included revised population estimates which incorporated new information on births, deaths, and migration changes since the most recent decennial census. This year’s population assessments also incorporated data on net international migration. The changes made to January 2026 data also reflected adjustments back to the April 2020 Census population base. After these head spinning revisions, the January 2026 employment number, on a not seasonally adjusted basis, showed a month-to-month decline of 2.05 million jobs and a decline of 895,000 jobs on a seasonally adjusted basis. Not surprisingly, our year-over-year household survey chart now shows January and February job growth to be negative 0.45% and negative 0.26%, respectively. Negative growth in employment is normally a sign of a recession which implies this is a major concern. However, since all these changes were applied to the month of January 2026, year-over-year or month-to-month comparisons are impossible. All in all, we have found the accuracy and assessment of BLS data to be troublesome in recent years so we would not make major decisions based on this data. Still, there does appear to be weakness in the job market. 

Pros

One may wonder why the recent stock market, despite all the volatility and the risks to oil and the Middle East, has performed as well as it has. We believe it stems from the fact that most traders expect the conflict to be resolved quickly, and the administration suggests it should. Moreover, conflicts and energy crises, on average, have not been a big negative for the equity market, particularly in recent years. A table on page 3, from The Stock Traders’ Almanac, shows that over the last 87 years equity markets have had an average gain of 3.4% in the six months (2.9% in twelve months) after the beginning of a crisis and a 7.6% gain in the six months (12.7% in the twelve months) following the start of a crisis over the last 47 years.

The worst one year experience was the 34.3% decline which followed the Arab Oil Embargo of 1973. This embargo sent oil prices from $2.90 to $11.65 a barrel, led to a rationing of gasoline in the US, and gave rise to inflation peaking at 11% in 1974. The second worst one-year performance followed the October 2001 invasion of Afghanistan. However, this decline was due primarily to the bursting of the Dot-com bubble in March 2000. In short, history suggests crises have not been major issues for the equity market.

In addition, some recent reports suggest the job market may not be as bad as we thought. The ISM manufacturing and nonmanufacturing employment indices rose to 48.8 and 51.8, respectively, for the month of February. As a result, the total employment index rose to 100.6, its highest level since February 2025. The ISM manufacturing index for February was down 0.2 to 52.4, but the nonmanufacturing index jumped 2.3 points to 56.1. Both ISM indices were up over 4% YOY, reflecting an improvement in the economy and the ISM nonmanufacturing survey showed improvement in each category, except for prices paid which fell from 66.6 to 63.0 – a positive. See page 8.

Although we are monitoring consumer data closely, most reports remain solid. Advance estimates of retail and food services sales for January 2026 were down 0.2% for the month, but up 3.2% YOY seasonally adjusted and up 3.1% YOY not seasonally adjusted. These were solid numbers and exceeded inflation of 2.4% YOY. Total vehicle unit sales were 16.1 million in February, up nearly 6% for the month, but down 1.8% YOY. The good news in this report was the 2.8% YOY increase in domestic light weight vehicles. Conversely, foreign light weight vehicle unit sales fell 7.0% YOY. This suggests the administration’s fiscal policy that gives tax breaks to domestic-made vehicles (Car Loan Interest Deduction) continues to have a positive impact on domestically made vehicle sales. See page 7.

New consumer credit data was also positive. Consumer credit outstanding increased $8.1 billion in the month of January, which included a $4.7 billion increase in revolving credit and a $3.3 billion increase in nonrevolving. As a result, the six-month rates of change for total, revolving, and nonrevolving credit were 1.2%, 1.4%, and 1.1%. The twelve month rates of change were 3.2%, 1.9%, and 3.6%, respectively. This is a significant improvement from most months in 2025 when revolving credit was contracting. Contractions in credit are often signs of consumer distress and recession. Perhaps the greatest positive of all is the growth in S&P 500 earnings. As fourth quarter 2025 earnings season ends, consensus estimates continue to increase. This week the LSEG IBES consensus earnings estimate for 2026 rose $1.33 to $316.69 and the 2027 forecast rose $2.37 to $367.81. The S&P Dow Jones consensus estimate for 2026 rose $1.28 to $313.60 and the estimate for 2027 jumped $2.50 to $365.30. This means the market is trading at 21.5 times the IBES 2026 estimate and 18.5 times the 2027 estimate. In sum, fundamentals remain solid and support buying on weakness. See page 10.  

Gail Dudack

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